Creating value from private equity investments

There’s a reason why private equity experts are hot in demand – you have to be a shrewd thinker to create real value from an investment of this type.

While there are umpteen strategies around, it would be fair to say that there are two which are the most common.

These two strategies come in the form of venture capital investments and leveraged buyouts. There are different potential uses for both, as we take a look at them to highlight how the experts really do create such high value from some investments of this ilk.

The first type we will talk about comes in the form of venture capital investments.

Most of the time this involves taking equity in a company which hasn’t quite made it yet – in other words, start-ups are common contenders for this type of finance, or just those companies who haven’t reached their potential for one reason or another. These reasons can span from anything including cash flow problems to a simple lack of revenue.

The major benefit to investors is that armed with this potential, they are still able to take large equity stakes. Clearly, if the company was established, this would not be an option – or it would come at a hefty price.

Therefore, there are huge rewards on offer for those companies who opt for this type of finance. A lot of the time they will also offer their expertise, in a bid to accelerate the business and ultimately make their stake more valuable.

Next, let’s take a look at leveraged buyouts. This is a much different type of financing option and involves a private equity firm buying a company through its own debt. This debt is collateralized by any of the assets of the company.

It stands to reason that this type of finance is hugely beneficial to private equity firms. After all, they don’t have to put much finance and are simply taking advantage of any value that the target company currently holds. Once again it means that they can get the very best return for their money.

Of course, there is a trade-off. Most of the time these private equity firms will be able to create value through their own expertise. There are countless companies around doing this and some will even take on individuals for brief periods to take care of this for them. For example, in Mexico one of the most well-known private equity investment experts is Javier García Teruel Avila and he combines his knowledge of PE investing with his management consulting to create maximum value.

The topic of creating value is significant and perhaps separates the “good” PE firms to the “excellent”. Those that are able to boost the efficiency of a company through various operational changes are seen as some of the best – as they are able to reap more value very quickly.

Nevertheless, as has been highlighted, the type of financial equity is still a key decision and does permit varied degrees of flexibility for those who are investing.